Tesla Stock: A Generational Buying Opportunity (NASDAQ: TSLA)

SpaceX and T-Mobile host joint event in Texas — Michael González

You’re here (NASDAQ:TSLA) is one of the largest manufacturers of electric vehicles in the world and one of the most popular stocks in the world. The company was catapulted into stardom during the 2020 stimulus-fuelled bull market, which sent the company from on the verge of bankruptcy as a trillion-dollar S&P 500 titan. This tremendous bull run sent Tesla’s stock price up over 1,300% and made many investors “Teslanaires.” However, since the macroeconomic environment changed in November 2021, high inflation figures have been released, Tesla has become a roller coaster for investors. The share price has now been slaughtered 73% from its all-time highs, with a 44% decline in December alone. This appears to have been driven by a range of macroeconomic factors. Plus, to a significant amount of stock selling by founder Elon Musk (which I’ll discuss in more detail in the Risks section). There were also a few reports of a drop in production in January 2023, expected at the Tesla factory in Shanghai. Although the company has yet to confirm this. With all this bad news, you might be wondering why am I bullish on the stock? There are several reasons for this, of course we know the company’s leading position and technological innovation. Additionally, Tesla customers are now ready benefit from a $7,500 EV tax incentive that was offered through the “anti-inflation law” and is expected to stimulate demand for EVs. Its action is also inherently deeply undervalued. In this article, I will review its financials, outline production updates, and review its valuation. Let’s dive into it.

Strong finances

Tesla has generated a strong financial position results for the third quarter of 2022. Revenue grew rapidly by 56% year-over-year to a record $21.45 billion, which is a strong upside. However, it missed analyst estimates of $428.34 million. This was primarily due to unfavorable exchange rate headwinds as the stronger dollar impacted international revenues. Overall vehicle deliveries increased 42% year-over-year to 343,830 units. The Y model generated the majority of sales, followed by the S model.

the aforementioned the tax credit is for electric vehicles that sell for less than $55,000 and so that includes Tesla’s best-selling Model 3 and Y models. However, with the options attached to the models, this will likely exceed the tax rate availability. I noticed that Tesla has relatively few low-cost models (under $50,000) available on their website, within 200 miles of Rodeo Drive LA. I suspect the tax credit has already helped boost sales of lower value models, which is a positive. I noticed that Tesla was giving away 10,000 free boost miles, which seems like an incentive to further stimulate demand.

Tesla vehicle fleet (Tesla site, copyright search)

In the third quarter of 2022, Tesla increased production by 54% year-on-year to 365,923 vehicles. The last Data (November 2022) shows that Tesla still dominates the electric vehicle market in the United States, with 65% market share. However, it should be noted that its market share has declined from 79% in 2020. For many years bearish analysts have said “competition is coming” for Tesla, but now it looks like they are finally starting to eat market share.

Ford is the second-largest maker of electric vehicles in the United States, but still trails Tesla with just 7% market share. The company produces the F-150 which is the most popular vehicle sold in the United States. Its new EV version of the F-150 is the forecasts will be released in 2023 and so I think that will be a major driver of sales. A silver lining for Tesla is that the overall EV market is growing, so the pie is getting bigger for all manufacturers. According to a study, the electric vehicle industry is expected to grow at a CAGR of 23.1% and be worth over $1.1 trillion by 2030.

Electric Ford 150 (Ford website, screenshot by author)

A silver lining for Tesla is that it doesn’t have to convert traditional internal combustion engine facilities into electric vehicle manufacturing plants, like many traditional automakers. Tesla is vertically integrated from the ground up and has even developed unique equipment to manufacture its cars, such as the world’s largest “gigapress”. Elon Musk has often said in the past that producing a prototype or low-volume vehicle is “pretty easy”, but large-scale manufacturing is the hardest part. Tesla ramped up production at its Shanghai plant in the third quarter, and its Berlin plant also produced 2,000 Model Y vehicles, although still in the early stages of a full ramp.

Tesla’s rate of innovation is so high that when traditional automakers think about breakfast, Tesla is already eating lunch. For example, I recently look at the Tesla Semi presentation by Elon Musk, which is currently in production. The company has reinvented trucking with a fluid design that’s been tested in a state-of-the-art wind chamber, to maximize its astounding 500-mile range. The truck would also be “as easy to drive as a Model 3, with virtually no training required” according to Musk.

Tesla has also innovated on the charging front with new announced “Megachargers”, which can charge at a staggering 1 megawatt. This essentially means that truck batteries can be charged up to 70% in 30 minutes, which is the average time a truck driver will take for a refresh break. The uniquely designed Cybertruck is also reported to start production in 2023 and will benefit from “Megachargers”.

Tesla increased its deployed energy storage to 2,100 MWh, which was up 62% year over year. The company has experienced some supply chain constraints as demand continues to “exceed supply”.

Tesla is also breaking new ground on the artificial intelligence front as the company announced its beta concept for a fully autonomous and even humanoid robot called Optimus, which I’ve covered in more detail in previous articles. AI has recently seen a huge resurgence in popularity. The Open AI institute, initially backed by Elon Musk, released the popular ChatGPTwhich, according to some analysts, could rival Google. I could imagine a ChatGPT-like AI model built into Optimus’ software, making it an information police while assisting with prompt-based tasks. This would really create a “superintelligence” quite easily given that the components are all available.

Tesla reported earnings per share of $0.95, which rose 93.57% year-over-year and beat analyst estimates by $0.06. The company also has a strong balance sheet with $21.107 billion in cash and short-term investments. The company has a fairly high debt of $5.87 billion, but only $979 million is short-term debt, due within the next 2 years.

Advanced Assessment

I have incorporated Tesla’s latest financial data into my discounted cash flow valuation model. I’ve projected 30% revenue growth for next year, which is pretty conservative given past growth rates above 50%. I gave a lower estimate due to the forecast of a lukewarm macroeconomic environment. However, in years 2-5, I projected a recovery with a revenue growth rate of 35% per year.

Tesla stock value (created by author Ben at Motivation 2 Invest)

To increase the accuracy of the valuation, I capitalized R&D expenses, which increased the bottom line. Additionally, I forecast a pre-tax operating margin of 20% over the next 10 years as the company scales and benefits from an increasing number of cross-sells between its products.

Given these factors, I get a fair value of $216 per share, the stock is trading at ~$109 per share at the time of writing and is therefore undervalued by around 50%.

As an additional data point, Tesla is trading at a price-to-sales ratio = 4.52, which is 52% cheaper than its 5-year average.

risks

Sale Elon Musk/Twitter

A key red flag is Elon Musk’s continued sale of Tesla shares. An SEC mid-December case reports that Elon Musk has sold 22 million Tesla shares, worth a staggering $3.6 billion. Musk is known to have slipped into Tesla’s factory and is very committed to the company, but when he repeatedly sells stock it contradicts that narrative.

Filing with the SEC (SEC annotation/author)

Musk may be selling stock to help pay off some of Twitter’s debt, which he has previously commented on. Many investors (including myself) believe that Twitter is a major distraction for Elon Musk’s mission at Tesla. In a recent vote On Twitter, 57% of people called on Elon to step down as CEO of Twitter, something he said he would respect when he got a replacement.

Other risks include the expected recession and competition that I have already spoken about.

Final Thoughts

Tesla is a formidable tech company with many competitive advantages, from its manufacturing to technology and even its strong brand/community. Tesla reached its previously “high” value by continuing to generate strong financial results. His stock is now deeply undervalued, so it could be a great long-term investment. I predict some short-term volatility over the next 12 months due to the recessionary environment, but Tesla’s tech advantages should keep them top of mind.